Internet-Shy Marsico Takes the AOL Plunge

A guy known for buy-and-hold investing has been buying lately, including the addition of Sony and NEC to his portfolios.
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You can't call Tom Marsico an Internet guy. The sector? "Speculative bubble."

Net darlings such as

Amazon.com

(AMZN) - Get Report

? "Flawed business model."

Yes, the founder of Denver-based

Marsico Capital Management

pretty much steered clear of the Web from the start.

But in the short and long term he can boast one of the best records in the business and recently managed to rack up impressive returns even without the Net names, whose explosive gains out of the gate pumped up many a growth fund.

So when he does decide to make an Internet play, it's time to listen. And when he takes a "meaningful position," tune in with both ears.

The stock?

America Online

(AOL)

. He added the Internet powerhouse when it slid not long ago into the 100 range. (It closed Wednesday at 119 1/2.) "There are some Internet companies that will be successful. AOL is one of them," he says. "We think they're going to strike a deal with

AT&T

(T) - Get Report

for access that will benefit both companies and the cable-TV industry as well."

AOL joins a very select group of stocks that make their home in Marsico's portfolio. He favors a concentrated approach to stock-picking --

(MFOCX) - Get Report

Marsico Focus rarely holds more than 30 names. But, in fact, the man who likes to be known as "Mr. Buy-and-Hold" has been doing a fair amount of buying lately.

Some of it is overseas, particularly in Japan.

Sony

(SNE) - Get Report

and

NEC

(NIPNY)

are recent additions. "We like the recovery that's going on in Japan. Plus, we think the country is behind on a lot of things going on in the U.S., such as networking," Marsico says. "These are two good ways to look at that opportunity."

Another favorite here at home:

Wal-Mart

(WMT) - Get Report

. But it's not the retailing giant's much-anticipated Web strategy that excites this growth-oriented manager. Good ol' bricks and mortar is good enough for him in this case. He predicts that new neighborhood stores, as well as a strong presence in the grocery store market, will continue to make Wal-Mart a winner. "The value is tremendous here."

At first glance, you can't say the same for Marsico's third-quarter numbers. Focus was flat for the three months, and

(MGRIX) - Get Report

Growth & Income was actually down about 2%. But both large-cap growth funds fared much better than the majority of their peers. The average in that category was a 4% loss during the quarter. And year to date, Focus delivered more than 18.4%, while Growth & Income is just a couple of points behind. Both funds rank near the top of the charts in their category.

A couple of key stock picks certainly didn't hurt. Marsico made a big bet on

Qualcomm

(QCOM) - Get Report

at the beginning of the year, and that tech stock has skyrocketed some 600% since. Biotech firm

Genentech

(DNA)

also helped boost numbers after Marsico purchased it for about $95 in its July initial public offering. It closed Wednesday at 167 5/8.

But the former

Morningstar

"Manager of the Year" credits the lack of misses rather than the quantity of hits for his recent success. "Not having a lot of mistakes really makes performance," he says.

And here, he gets back to the Internet. Most Net companies, he says, just aren't worth the price. "The margin assumptions you need to support the valuations just aren't realistic." When large multinational companies such as Wal-Mart get into the Web game in earnest, Marsico believes that will be made quite clear.

Not AOL, though. That's one Net name he expects to hold for a while.

And that's true, too, for the other large-cap growth names that dominate his portfolio. Media names such as

Time Warner

(TWX)

and financials like

Citigroup

(C) - Get Report

continue to take top slots there.

But the manager who proudly proclaims "we buy our companies for life" didn't hesitate to take some money off the table earlier this year. Gone: long-time holding

Microsoft

(MSFT) - Get Report

. Uh-oh. Does taking profits on that winner spell a B-I-G capital gains distribution?

Marsico says no, since he also got rid of some losses, such as

Southwest Airlines

(LUV) - Get Report

, even though he likes the stock long term. "We've done our tax planning. The tax bill will be very small for our shareholders," he says.

And even a big bill wouldn't likely scare off investors. Despite a higher-than-average expense ratio, Marsico's funds keep pulling in money by the truckload, even as the industry sees a slowdown in new cash. Created less than two years ago, Focus is now $2.4 billion strong, and its much smaller sibling, the $700 million Growth & Income fund, is taking in fresh dollars too.

With the type of large-cap names Marsico specializes in, that growth shouldn't pose a problem. This year, he's proven that his funds weather a variety of environments, not just the narrow go-go growth markets. In fact, he uses the downturns to pick up a few bargains.

And, yes, that means the occasional Net name.

Ugly Ducklings Have Their Day

I know, I know -- ouch. That's the sound you no doubt made as you checked out your returns for the third quarter. Big red minus signs adorned nearly every category. And even the winners of the fund popularity contest for the past few years, such as growth funds, took big hits, while long-time dogs, such as precious metals funds, didn't do so bad.

Proof that every sector has its day? An argument for going against the grain? Maybe we shouldn't be so surprised. Can't quite say I told you so, or even say that I followed my own advice. But back in May, I reported on

Morningstar

research that showed if you owned a basket of the three least-popular categories of funds (measured by cash outflows), and held it for three years, you'd beat the average equity fund.

Last year's most disliked? Natural resources funds, up 29% in 1999; Pacific stocks except Japan, up 30% this year; and Latin America funds, up 16%.

Not bad when you remember that the average U.S. stock fund has barely moved 5% in 1999.

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at

TSCBrenda@aol.com.